Sunday, April 03, 2011

Another Name for "Trade Deficit" is "Capital Account Surplus," Balance of Payments Always = 0

Here's another look at the balance of payments data back to 1980 (BEA data here), demonstrating graphically Don Boudreaux's statement that "another name for “U.S. trade deficit” is the “U.S. capital-account surplus” – that is, inflows of investment funds into America that supply (directly or indirectly) financing for more capital creation in America."

As a direct consequence of our current account deficits, the U.S. economy has been the beneficiary of more than $8 trillion worth of capital inflows from foreigners since 1980. Because the Balance of Payment accounts are based on double-entry bookkeeping, the annual current account and capital account have to net to zero, so that any current account (trade) deficit (surplus) is offset one-to-one by a capital account surplus (deficit) and the balance of payments therefore always nets out to (equals) zero. And that's why it's called the "balance" of payments, because once we account for trade flows and capital flows, everything balances, and there are no deficits or surpluses on a net basis.

47 Comments:

Right. But look at the 10 year 'growth' of employment, its negative. Capital doesn't employ people only being able to export does. This influx of capital has bloated our capital markets: rates are too low and the stock market is too high. It has distorted proper market functioning. It is myoptic to believe that this capital inflow has been good for us.

To take a long, non-myopic historical view, the U.S. ran trade deficits and had capital inflows for most of the 19th century, and that helped the U.S. grow from a minor British colony to an economic superpower.

This is how it's really working: The government borrows $1,000.00 from, say, Japan, and uses that money to hire a faceless, paper-shuffling bureaucrat that goes to meetings, presentations during the day, and cocktail parties at night.

Said Washingtonian buys a computer from Toshiba. What just happened? No worthwhile, productive work got done, and the government now has another thousand dollars of debt that my kids will have to pay.

Maybe he's working for that super-duper, federal unemployment supplemental payments until the end of time, or the coming of Hallelujah (whichever comes first) program. He feels so good he shuffles another Billion out the door, and another million unemployed go out and buy Toshibas. How are we doing so far?

Multiply this a few thousand More times, and we have a $14 Trillion Debt, no jobs, no industry, and a Dollar that makes an Iraqi Dinar look like real money.

To quote that famous philosopher, and raconteur: This is a pig. You can glop the whole Maybelline factory on its snout, and it won't be any prettier. It's still a pig.

Benjamin: "What ever happened to GDP=C+I+G+(X-M)? Is that no longer taught in econ school?"

Benjamin,

That equation represents one of three methods of estimating GDP. This is the expenditure method of deriving a GDP estimate - as opposed to the output method and the income method. It turns out that the expenditure method is much easier to derive, and so that method is generally taught and discussed.

The expenditure approach for estimating GDP tells us abosilutely nothing about what drives GDP or how to increase GDP. Many forget this point, and try to use the equation to show that government spending will increase GDP. Or try to show that increasing exports will increase GDP.

Of course, mercantilism was proven long ago to be a failure at increasing the standard of living of a nation's population. But that doesn't stop people from trotting out GDP=C+I+G+(X-M) in attempts to demonstrate that imports are bad and exports are good.

Again, the equation you cite is for estimating GDP. It is not at all an equation which can be used to explain how a nation increases its wealth.

Just look at the gains in income and the growth of jobs over the past thirty years. The nation as a whole has prospered at exactly the same time that global trade has increased. The current recession is a blip, of course, and its causes have nothing whatsoever to do with global trade.

It is true that some Americans have propered more than others. The increasing returns to education are real. And some industries, such as health care, have received far more of the increased income than have others. But overall, there is no question whatsoever that the nation's income and the nation's employment has increased almost in lockstep with the increase in global trade.

What is often lost in the foolish focus on the current account deficit (aka, the trade deficit) is that U.S. exports rose to all time highs exactly as U.S. imports rose to all time highs. That's no coincidence.

"Just look at the gains in income and the growth of jobs over the past thirty years. The nation as a whole has prospered at exactly the same time that global trade has increased"...

Oh yeah jet beagle, I totally agree...

What I was actually looking for was something more substanial (and credible of course) in print or as a web posting but not for myself but for some other folks that aren't quite so observant or don't understand what they are observing...

"What is often lost in the foolish focus on the current account deficit (aka, the trade deficit) is that U.S. exports rose to all time highs exactly as U.S. imports rose to all time highs. That's no coincidence"...

Again no argument from me here either...

Still one has to wonder how much the 'current account deficit' is contributing to the real GDP and not the government declared GDP today...

Jet Beagle, the U.S. was the world's greatest creditor for much of 1900 -> 2000. The U.S. Treasury is listing huge foreign holdings of U.S. securities as liabilities -- the result of massive trade deficits. The U.S. is now the world's biggest debtor, thus, by U.S. treasury notation; Liabilities (foreign owned U.S. securities) > Assets (U.S. owned foreign securities).

I agree that the level of borrowing by the U.S. government is very troubling. But that borrowing has nothing whatsoever to do with global trade balances. The U.S. government would have borrowed just as much if the U.S. recorded a current account surplus.

The holdings of private U.S. securities by foreigners is a very positive characteristic of our nation. That shows very simply that foreign investors are convinced the U.S. is a good investment. When a British investor purchases equity in Microsoft, or when a Korean investor buys 3M bonds, they are in effect saying that those American companies will provide excellent returns on the capital invested. Why would that be a problem for the U.S. or for those companies? What is not to like about the confidence foreign investors have in our nation's corporations?

I am taken aback by the personal umbrage you seem to exude. Try Sanka brand. I have raised reasonable questions.

BTW, the 750,000-memeberr Chines Communist Party controls nearly every facet of China's political and economic life. They in fact hold controlling shares in every publicly held Chinese company, and construct five-year grwoth plans for the Chinese eocnomy. China is a facist-mercantile juggernaut.

Jet Beagle--

Yes, but it seems to me that a surge in exports, of the kind we are now enjoying, does create jobs in the USA.

Are you ready to take the position that increased exports is meaningless for the USA?

Jet Beagle, by logical extension: the larger the trade deficit, the larger the capital account surplus, the larger the stock market heights. No, its not that simple, because to keep the U.S. economy liquid we have quantative easing. Money is devalued with communist and oil producing countries gaining capital power/leverage. Hmmm

What are you trying to imply? What does your "Hmmm." mean? Do you fear Asian people? Do you fear oil producing countries? I don't. But if you do, doesn't it make you feel comfortable that those peoples and countries depend on us for their well-being? that we're among the largest purchasers of the goods they are trying to sell?

I do not care whether the U.S. has a capital account surplus or not. I do care whether U.S. businesses are able to attract the capital they need to continue growing. The U.S. savings rate has declined drastically over the past thirty years. I am happy that foreign investors have the resources to take up the slack.

There are problems with the U.S. economy. The low savings rate of the nation and the incredibly high burden of government spending are the largest ones. But global trade did not cause those problems. In fact, global trade has made those problems much easier to bear.

Benjamin: "Are you ready to take the position that increased exports is meaningless for the USA?"

Of course not. But lack of exports is not a problem for the U.S. As I pointed out earlier, U.S. exports have risen to all-time highs in the 21st century.

What you seem to be objecting to is not exports but rather the meaningless statistic commonly known as the "trade deficit". If so, then exports are not your problem. Rather, you are objecting to the level of imports.

If, for some reason, your goal is to reduce imports, the least harmful way to do that is to get the government to stop preventing development of domestic petroleum.

Jet Beagle, how do you surmise that I fear Asians? I don't and your assertion is weird. I am concerned about the increasing capital leverage that communist and oil producing countries have on the U.S. This does not seem to bother you and so we disagree on this. We agree that global trade can be very beneficial and U.S. government debt is onerous.

"So, our Trade Deficit will be just about the amount that we borrow from other countries (basically, the same countries) to finance our budget deficit."

You haven't explained what's wrong with this. We buy things from people with paper money, and they buy IOUs with it. What could be better?

If you were to suggest that a budget deficit is a bad thing, you would get few arguments here. I believe most readers here agree with that. But you are complaining about the method used to finance that deficit. That's a symptom of the problem, not the problem itself.

"No way, Doc. Your scheme might hold water if we were running some semblance of a balanced budget, but it no workee under these circumstances."

By the way, not to take anything away from Dr. Perry, but that's not his scheme.

It either works, or it doesn't. Balance of payments must be zero, period. Imports are paid for with exports, FDI, or IOUs. Where do you see the problem?

Federal budget deficits may allow the selling of IOUs, but they aren't the cause of it. You should direct your ire at those creating the budget deficit.

"Said Washingtonian buys a computer from Toshiba. What just happened? No worthwhile, productive work got done, and the government now has another thousand dollars of debt that my kids will have to pay."

Wait! Wait! There are things missing from your story here. What did Toshiba do with the little piece of paper Washington gave them in exchange for the computer? Did they buy US exports, invest directly in the US - a factory perhaps - or did they buy IOUS?

If it was IOUs, I agree Washington shouldn't have spent money they didn't have, and needed to borrow.

Why did Washington buy a computer if not to increase someones productivity? If it's jobs that are a concern, the computer was a bad idea. More people could stay employed writing with ball point pens and using hand calculators, although probably at a lower wage than that of a skilled computer operator.

"BTW, the 750,000-memeberr Chines Communist Party controls nearly every facet of China's political and economic life. They in fact hold controlling shares in every publicly held Chinese company, and construct five-year grwoth plans for the Chinese eocnomy."

I have yet to hear a reasonable explanation of why any of that should concern me when I engage in voluntary and advantageous trade with those unpleasant people.

"China is a facist-mercantile juggernaut."

So what? The Chinese people are hurt by this, you and I are not.

BTW, are you trying out a new Android phone? Your typing and spelling remind me of Hydra.

So on Saturday it was only 3.5 trillion since 1960. Now it is 8 trillion since 1980. In both posts the numbers seem to be referring to foreign investment inflows but the numbers are so different I must be missing something.

Really as an airline employee looking at what's happening as far as passenger loads are to various cities both domestic and foreign one gets an anecdotal feeling (not necessarily a correct one I'll admit) of how things are going...

Let me give you an example...

When a local outfit, Engineered Air Systems sends out lots of people to both Asian and European countries one wonders what's up...

2, 3, sometimes six months later a friend of mine who works for FedEx at the same airport says all of a sudden they're shipping six to ten containers of Engineered Air System products a night to Asia or Europe...

Sometimes this shipping of product will last for two or three weeks in a row, everyday a number of contairners outbound to a foreign country...

Its hard for me not to jump to the conclusion there is some positive foreign trade happening and if its happening locally how many other places in the US is it happening?

It would be nice to get some real numbers on what's happening nation wide...

Jet Beagle, are you really John Dewey? If so, then I know, for sure, that you are employing a Socratic thread with me. It's interesting that you are more formal at Cafe Hayek and causual at Carpe Diem -- different personnas but both engaging.

I am the John Dewey who comments regularly at Cafe Hayek. No intent to deceive on my part. For some reason I started responding on this blog using my JetBeagle blogger ID, which has Jet Beagle as my public name.

Buddy Pacifico: "It's interesting that you are more formal at Cafe Hayek and causual at Carpe Diem -- different personnas but both engaging."

Thanks for the compliment. I think many of the commentors at Cafe Hayek are professional economists. I may respond differently there because I'm a little more careful with my wording. But it's not anything I consciously do.

One thing I try to do in both places: be respectful of others. But I'm human and not perfect. If you ever catch me not being respectful, please correct me.

These are current dollars - unadjusted for inflation. But even if they were converted to constant dollars, the export levels of 2006 to 2010 would still be the highest levels ever - by a long shot, in fact.

There is, of course, a difference between wealth and prosperity. MJP is right that trade produces wealth, but then what? When we buy stuff made by foreign humans, we must, by default, invest the money they give us in making stuff made by machines. This makes their workers prosperous and our robot-owners prosperous. All of the math works out, wealth is maximized, and 1% of the American population can't figure out what the other 99% are so pissed off about.